Q & A: What you need to know about cosigning a student loan

Getting into college is one of the major accomplishments that is quickly followed by questions of how to pay for college. If your child will need to use student loans to help pay for college, you may be asked to cosign the loan. Before you sign on the dotted line to be a cosigner, get the facts about cosigning and learn what that means for you.

What does it mean to be a cosigner on a loan?

As the cosigner of the loan, you and the student are both responsible to repay the loan plus interest. Even if you've agreed that the student will make all or some of the payments, in the lender's eyes, you're equally liable. If at some point the student doesn't or can't meet the loan obligation, a lender will expect you to make payments.

Who can cosign a student loan?

Parents are the most common cosigners for student loans, but they're not the only ones. A relative, family friend, or creditworthy adult can cosign as long as they meet the lender's cosigner eligibility requirements. As a cosigner, you have a vested interest in the student's educational success, so you should know the student well. You should also be comfortable discussing finances with them.

What are the benefits of cosigning a student loan?

When a creditworthy adult cosigns a student loan, the student may receive a lower interest rate. Even a 0.25% reduction in the interest rate can save hundreds or thousands of dollars in interest over the life of the loan.

Cosigning also helps the student establish credit, and on-time payments will improve the credit scores of both the student and cosigner. That means the next time the student applies for a loan, it may be easier to do so without a cosigner.

Can a student get a loan without a cosigner?

Getting a private student loan without a cosigner is possible, but it's not always easy. Lenders look for applicants with an established credit history, a strong FICO® score, and the ability to repay the loan. Future college students with little-to-no income and no credit history may not meet the lender's criteria.

How much should you cosign for?

In general, you don't want to borrow more than you can afford to pay back before you retire. If you have a lot of other debt, have several students that need assistance with their loans, or are behind on your own retirement savings, you may not be able to or want to cosign a student loan. Consider consulting a financial advisor to determine how cosigning could affect your financial situation.

How is a cosigner's credit affected?

The cosigned loan amount will become part of the total debt that lenders look at when deciding whether you qualify for additional loans or credit, such as a mortgage, small business loan, or car loan. Even if all loan payments are current, a high balance could impact your ability to qualify for a future loan or prevent you from qualifying for the lowest interest rate.

Payment history is one of many factors that go into determining your credit score, so if the student misses a loan payment, your credit score may be affected negatively.

What happens if the student stops paying?

Although you may think it is unlikely that the student stops repaying the loan, you should understand what happens if that unfortunate situation arises. If the student cannot make the payment on the loan, you, as the cosigner, will need to take over the remaining payments. Before you agree to be a cosigner, consider how that situation could affect your relationship with the student and how making the payments could impact your own financial situation.

Talk through a worst-case scenario well ahead of time to help both of you feel more comfortable with the arrangement. For instance, what if the student has trouble finding a job after graduation or runs into other financial difficulties that make repayment impossible? If you make loan payments on their behalf during that time, will they be obligated to repay you later on? Determine how the student intends to pay back their loan, whether they expect a financial contribution from you, and what access you will have to the loan documentation and account history. Setting expectations from the start can help you avoid financial and emotional stress down the line.

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